Are Diversified Growth Funds the golden ticket for investors?
CAMRADATA white paper offers insight into the decade-long success of DGFs & the impact of a restrained market
CAMRADATA, a leading provider of data and analysis for institutional investors, has published a new white paper, Diversified Growth Funds – ‘An all in one solution?’ following a roundtable discussion with key investors and asset managers, hosted by the firm in London this July.
While Diversified Growth Funds (DGFs) remain an attractive proposition to institutional investors looking for more efficient returns than the equity markets, CAMRADATA’s DGF roundtable asked if managers can reach, and exhibit, the holy grail of true diversification and differentiation with an all in one solution?
Sean Thompson, Managing Director, CAMRADATA, advised that not all DGFs will deliver on their promise of more efficient returns. Many investors look at equity market returns and complain that DGFs have been disappointing by comparison. This begs the question when will markets turn?
Some DGFs are prepared now for corrections while others are more constructive on economic prospects for the years ahead. The best DGFs are worth the candle: the onus falls on clients and their advisers to discover and monitor them.
The CAMRADATA panel highlighted that there is much wariness among professional investors lest another crash appears. Paradoxically, liquidity remains abundant to push asset prices even higher. The panel reflected on these conflicting sentiments in current markets.
Key highlights included:
Tony Finding, co-manager of M&G’s Episode Allocation Fund, told the CAMRADATA panel why: “There was a favourable period after the Great Financial Crisis – approximately 2010 to 2016 – when bond markets were on a fabulous journey.”
DGFs, which had just been established as a distinct investment category, could easily draw on fixed income to fulfil their brief of offering decent returns with lower volatility than equities.
But Tony Finding noted that for the last two years, that ride has become more bumpy. “Bonds now are risk-additive,” he said.
Paul Flood, manager of Newton’s Multi-Asset Diversified Return Fund said the weight of money financing private equity secondaries reminded him of 2006-7. “Private equity is now trying to buy the same companies we are,” he warned. “I don’t see how they will make their higher expected return.”
Some DGFs themselves, however, have struggled to make expected returns in spite of the freedom to invest across a very broad range of strategies.
Both Flood and Finding view the recent underperformance from a number of DGFs as understandable. “The Great Financial Crisis shocked investors and the trauma persists to this day,” said Flood.
“Lots of fund managers expected disappointment sooner and positioned cautiously for that scenario, but there has been precious little correction.”
The three DGFs on the CAMRADATA panel were then asked whether they were now taking risk off the table.
Andrew Harman, manager of the First State Investments’ Diversified Growth Fund, responded that it was holding little more than 10% net exposure to equity, which is a major reduction from February 2016 when the Fund had over 50%. This is a result of two key views; equity valuations are high and opportunities within bonds are preferred in the shorter term.
This is what Harman describes as the Fund’s flexible and dynamic approach, blending both alpha and beta components: “We recast the long-term beta allocation every six months and employ shorter term investment signals to capitalise on alpha opportunities, where they present themselves”.
The discussion also looked at finding opportunities in the DGF markets and searching more widely for new sources of return, as well as what the triggers for something going wrong might be.
Sean Thompson, Managing Director, CAMRADATA said, “This latest white paper reveals that true innovation within DGFs can, and is, being achieved, despite some believing the DGF market has run out of steam. It also offers key insight on the impact of a restrained market and potential sticking points.”
Click here to download the white paper.